Archive for category Daily Service
Huffington Post blog post by Mark Van Mourick
According to the Wall Street Journal, over the next 20 years, approximately $25 trillion will be passed to women through divorce, death of spouse or inheritance. Currently, women make up just under half of the nation’s millionaires. If their earning potential continues to grow on track, they will account for up to two thirds of the nation’s wealth by 2030.
Over the years, I have assisted a number of women from ages 30 through 80 with unique problems and issues arising from the death or divorce of their wealthy husbands. Oftentimes, these women are not actively involved in either the day-to-day management of their household money or the management of their investments. While they may have considerable assets to meet their financial requirements, they’re starting from a handicapped point of view, both from an educational standpoint as well as an emotional one. This “mental freeze” often leads to either cash hoarding (as opposed to investing) or being manipulated by a commissioned salesman.
If you are a recent widow or divorcee reading this, I truly empathized with you. Besides managing your grief, you are trying to deal with monumental changes in your life and are facing a growing list of perpetually unfamiliar monetary choices. Let me offer a few quick suggestions:
- Do not make significant decisions under duress or too quickly. Typically, the response to newly-obtained wealth is to be protective and act immediately in an effort to safeguard personal finances. Decisions about selling real estate or other large, financially-impacting choices can wait until input is received from trusted advisors and a plan for preserving irreplaceable capital is in place.
- Conduct a full risk assessment analysis of your current financial situation. Widows, divorcees and the newly wealthy are faced with being pushed from personal comfort zones to invest or withdraw some of their principal funds. Conducting a full risk assessment and starting slowly with investments will assist in understanding personal risk and volatility tolerance.
- Meet regularly with your financial advisor. Stay up-to-date on your investments through quarterly meetings. Strive to fully understand each investment and don’t let a disappointing trend last more than two quarters.
- Deposit all of your income directly into a bank or brokerage account. Ask your accountant to give you an estimated monthly after-tax income figure to be deposited into your household bank account. This will ensure a monthly “pay check” to cover fixed and discretionary expenses.
- Create a home budget. Even if a budget has never been needed, it is important to know the amount of monthly fixed expenses such as housing, food and gas. Recognizing the fixed monthly income needed prior to making any discretionary purchases is critical to maintaining a savings balance.
Often women look at money differently than men, viewing their money as a reservoir and they can be very protective to keep the amount from dropping. Men tend to view money like a stream, with the mentality that they earn it, spend it, earn more, spend more, etc. with less concern for their savings balances.
Given the above and the need to use conservative investments, low interest rates are single women’s biggest challenge if they are trying to live off of their savings. Typical “safe investments” like money market funds, CDs and short-term/high quality bonds all pay less than 1 percent today. In this case, a widow with $1.0 million would be earning under $10,000 per year on these kinds of investments — well below her basic cost of living.
Unless they have tens of millions of dollars, widows and divorcees are faced with being pushed from their comfort zones to invest into stocks, junk bonds and real estate, and/or have the option to withdraw some of their principal. Both scenarios are in contrast to their desire to protect their principal.
Once these women understand their financial situations more clearly, have a plan for preserving their irreplaceable capital, an idea of realistic cash flow to sustain their lifestyle needs, and have the basics of investing under their belts, they feel more confident about their financial future.
Posted by Steven Maimes, The Trust Advisor
The Huffington Post by Shana Ecker
In April, we reported that Zsa Zsa Gabor and her ninth husband, Frederic Prinz von Anhalt, were allowed to remain in their Bel Air mansion until the actress dies or for three more years. And, a potential buyer would need to comply with these unconventional provisions, which were court-ordered by Los Angeles Superior Court Judge Reva Goetz. Well, they’re in luck — it was confirmed that Gabor sold her home on Monday for $11 million.
Although Von Anhalt and his wife celebrated the news over champagne, not everyone is as happy with the sale. ABC News reports that Kenneth Kossoff, who represents Gabor’s daughter Constance Francesca Gabor Hilton said about the starlet: “If she lives beyond three years it could be a disaster”. Apparently, taxes and other costs related to the sale could cost the couple more than they have.
In fact, in efforts to generate income for Gabor’s medical care and home expenses, they had resorted to renting the stunning 8,878-square-foot, 6-bedroom home as a movie set for films like Argo and the upcoming HBO film “Behind the Candlelabra” starring Michael Douglas as Liberace and Matt Damon as his companion, Scott Thorson.
The mansion, which was listed by Roger Perry of Rodeo Realty, was reportedly sold to an LA-based real estate holding firm, according to Curbed.
Posted by Steven Maimes, The Trust Advisor
How is an Illinois Trust Now Like a Fine Wine? It Can Be Decanted: A Summary of the New Illinois Decanting Statute
Written by Stephanie Moll and Steve Dawson
Effective January 1, 2013, Illinois statute authorizes “decanting” of irrevocable trusts.
What is decanting, you ask? Isn’t that something you do with a bottle of wine? Yes, it is, and just like you decant wine from one bottle into a new container to remove sediment and to allow the wine to breathe, when you decant a trust, you pour the trust assets from one trust into another trust, allowing flexibility in the terms of an otherwise irrevocable trust.
Illinois recently enacted a new Section 16.4 of the Trust and Trustees Act, entitled “Distribution of trust principal in further trust” (the “Decanting Statute”). The Decanting Statute allows the trustees of an irrevocable trust (the first trust), acting pursuant to their fiduciary duty (and assuming certain conditions are met), to distribute all or part of the existing trust to a different trust (the second trust).
Decanting When a Trustee Has Absolute Discretion
If the trustees have “absolute discretion” over the first trust, they are given broad discretion over the distribution to the new trust. These trustees may “distribute part or all of the principal of the trust in favor of a trustee of a second trust for the benefit of one, more than one, or all of the current beneficiaries of the first trust and for the benefit of one, more than one, or all of the successor and remainder beneficiaries of the first trust.” In this case, if the beneficiary of the first trust could otherwise receive the principal of the first trust outright, the trustees can grant the beneficiary a power of appointment (including a presently exercisable power of appointment) in the second trust to appoint the trust property among a class of permissible appointees that is broader or otherwise different from the beneficiaries of the first trust.
Decanting When a Trustee Does Not Have Absolute Discretion
If the Trustees do not have “absolute discretion” over the principal of the existing trust, they can still decant the trust into a new one, but with more limitations. They may “distribute part or all of the principal of the first trust in favor of a trustee of a second trust, provided that the current beneficiaries of the second trust shall be the same as the current beneficiaries of the first trust and the successor and remainder beneficiaries of the second trust shall be the same as the successor and remainder beneficiaries of the first trust.”
In addition, (i) the new trust must include the same distribution language as the first trust; (ii) if the first trust includes a class of beneficiaries, the same class of beneficiaries must be included in the second trust; and (iii) if a beneficiary has a power of appointment over the first trust, the beneficiary must have the same power of appointment over the second trust. An exception to these rules applies if the trustees of the first trust distribute all or a part of the principal of a disabled beneficiary’s interest in the first trust to the trustees of a second trust which is a supplemental needs trust for the benefit of the disabled beneficiary.
The trustees do not need the consent of the settlor of the trust, any of the beneficiaries of the trust, or the court if (1) the trustees and one legally competent current beneficiary gives notice to all of the legally competent current beneficiaries and presumptive remainder beneficiaries, and (2) no beneficiary objects within 60 days of the notice. If a charity is a current beneficiary or presumptive remainder beneficiary, notice must also be given to the Illinois Attorney General.
The exercise of the decanting power is made in writing, signed and acknowledged by the trustee and filed with the records of the first and second trusts.
The second trust can have a term that is longer than the term of the first trust. Unless the first trust expressly permits an extension, the second trust must be limited to the same permissible perpetuities period that applies to the first trust.
WARNING: If the first trust does expressly permit an extension of the trust term to a new perpetuities period, be sure to review the federal tax consequences of any such extension.
The Decanting Statute provides that the Trustees cannot exercise the power to decant for any of the following purposes:
1. To reduce, limit, or modify mandatory distributions or any withdrawal rights that have already come into effect (except with respect to the creation of a new supplemental needs trust);
2. To decrease or indemnify against a trustee’s liability or exonerate a trustee from liability for failure to exercise reasonable care, diligence, and prudence;
3. To eliminate a provision granting another person the right to remove or replace the trustee, unless another independent individual entity, acting in a non-fiduciary capacity, has the ability to remove or replace the trustee; or
4. To change the perpetuities provision in the first trust, unless the first trust expressly permits the trustee to do so.
The Decanting Statute applies to all trusts in existence or created after the effective date of the new Act, January 1, 2013.
Posted by Steven Maimes, The Trust Advisor
Cisco blog post by Steve Ridder
The wealth management industry is under transformation. In an effort to win back trust, attract new customers and retain existing ones, firms are investing in new collaborative technologies that support their business model transformation from transactions to interactions focused on client centricity.
Various McKinsey research and studies have shown that those who adopt more client-centric tools and processes can increase revenues up to 20 percent and profitability up to 2.5 times. Cisco’s own research has shown that wealth management firms that adopt client centric tools such as video can reduce client attrition, especially for the critical under-55 segment. Part of this transformation involves investing in video capabilities that enable firms and their experts to touch more customers, more often and in a more intimate manner than voice and email do today.
Getting the right expert to the right customer, at the right time is crucial in being able to offer superior customer service and improve cross-sell and up-sell rates. Another critical, competitive differentiator is embedding video capabilities into the mobile channels and applications customers already use. Enabling customers to easily connect with relationship managers streamlines the buying and advisory processes.
Combining video with mobile devices enables banks to conduct high-value interactions with their customers on any device, anytime, anywhere. Embedded video collaboration enables wealth management firms to do just that. By evolving their mobile banking experience from reading balances and bill pay to full-on advice with video conferencing, expertise access and collaborative content sharing, firms can improve their competiveness and differentiation by improving customer experience. Not only that, but by reaching customers more often, firms can improve their customer retention and increase cross-sale rates.
Delivering this rich collaboration capability is an important part of Cisco’s omnichannel banking approach. It enables banks to take advantage of their customers’ existing mobile devices built-in video capabilities to videoconference with bankers on their existing corporate video conferencing and collaboration tools. The explosion of video-enabled mobile devices already allows customers to take snapshots of checks to streamline the deposit process.
Now banks can enhance that functionality by allowing customers to also perform full-fledged video conferencing on their mobile device, enabling access to their wealth manager anytime, anywhere. Cisco offers a set of Application Program Interfaces and Software Development Kits that enable firms to embed video and other collaboration functionality directly into mobile, web and other applications.
One of the world’s largest financial services firms recently implemented a pilot of this technology to take their existing tablet wealth management application to then next level. By embedding video and collaboration capabilities into the tools customers already use to check balances, make trades and monitor their positions, this firm has enabled their top clients to connect with their wealth managers almost instantly to react to market events and receive advice on demand.
For complex transactions involving multiple experts, the ability for wealth managers to find, locate and conference in experts, with the customer, enables faster decisions. This allows customers to get back to their daily lives and firms to interact with more clients on a daily basis. Not only do we embed video conferencing into their mobile applications, but we also integrate co-browse and application sharing, enabling customers and their wealth managers to review portfolios and transactions, perform what-if scenarios, and make financial decisions in real-time. These same capabilities are also embedded into the wealth manager’s mobile applications, freeing them up from having to be in the office all the time and allow them to conduct business efficiently while on the road or at a client’s home.
Although still in early stages, I already see rich collaboration transforming the way wealth management firms and their clients interact with each other, enabling new experiences and business models. As televisions and other consumer devices become as video-enabled as mobile devices, this same technology can also enable firms to interact with clients from home. These new ways of interacting will change the way business is done, improve the wealth management industry from a series of transactions into relationships, and allow firms to create lifelong partnerships with their clients.
Posted by Steven Maimes, The Trust Advisor
By WSJ Staff
The IRS scandal, in which tax-exemption applications from conservative groups were targeted, has highlighted the roles of several officials both in the IRS as well as in the Treasury Department and White House.
Here’s a rundown.
Douglas Shulman (Former IRS commissioner)
Douglas Shulman led the IRS from March 2008 until November 2012. Members of Congress have focused on the former IRS chief’s statements to a congressional panel in March 2012, saying that the tax agency had not targeted Republican-aligned political groups. But he didn’t correct his testimony after learning of the problems in May of that year, according to congressional investigators. He has said that he didn;t correct his testimony because the inspector general report
J. Russell George (Inspector general for IRS)
J. Russell George, the Treasury Inspector General for Tax Administration, was nominated by President George W. Bush and confirmed by the Senate in 2004. His investigative report blamed the agency’s managers for allowing the improper practices to continue for more than 18 months. The report called on the IRS to better document the reasons for choosing groups for extra review, request better guidance on rules by the Treasury Department, and quickly resolve cases—some of which “have been in process for three years.”
Steven Miller (Former acting IRS commissioner)
Steven Miller, who departed as acting commissioner in May 2013, faced fire in hearings for not disclosing problems to Congress as he learned of them. Mr. Miller cited the continuing inspector-general investigation, even though he obtained an internal IRS investigation in May 2012 that came to some of the same conclusions as the inspector general report. He also took exception to the idea that the IRS had engaged in targeting conservative groups, pointing out that groups representing other ideologies also were caught up in the extra review.
Lois Lerner, head of IRS tax-exempt organizations division
Lois Lerner, who heads the IRS division in charge of tax-exempt organizations, was briefed on the “tea party” searches in June 2011 and raised immediate concerns, according to the IG report. She immediately instructed her department to revise the criteria used for these searches. But her guidance was not followed. Later, in 2013, she was the first to publicly disclose the imminent report from inspector general, in an answer to a planted question at an appearance at a tax conference May 10. She declined to answer questions in a May 22 House hearing.
Celia Roady, IRS advisory council member
Celia Roady, a Washington lawyer and member of the IRS advisory council on tax-exempt and government entities, asked the question to Ms. Lerner at the conference. She said in a statement that Ms. Lerner provided her the question to ask. She added that Ms. Lerner “did not tell me, and I did not know, how she would answer the question.”
Holly Paz, IRS official
Holly Paz is a senior official in the policy making division of the exempt organizations unit. According to Rep. Darrel Issa, his House Oversight and Government Reform Committee has interviewed Paz, and he said she participated in an IRS internal investigation that concluded in May 2012 about issues similar to what the inspector general was investigating. She also cooperated in the IG audit, according to emails.
Kathryn Ruemmler, White House counsel
Treasury Department attorneys told White House counsel Kathryn Ruemmler in late April that the audit was coming, and outlined its findings. She soon told White House Chief of Staff Denis McDonough and some other senior aides about the audit’s findings. But she also told them they shouldn’t alert the president—a suggestion White House spokesman Jay Carney said they followed.
Neal Wolin, deputy Treasury secretary
Deputy Treasury Secretary Neal Wolin said he learned in 2012 that the inspector general was auditing the Internal Revenue Service’s processing of non-profit applications and told him to “follow the facts wherever they lead.” A separate Treasury statement said Treasury officials were notified in June 2012 that an audit had begun. Treasury also said Wolin and his boss, Treasury Secretary Jacob Lew, learned about the findings when they were reported publicly in early May 2013.
Posted by Steven Maimes, The Trust Advisor
Forbes story by Edwin Durgy
U.S. Trust released its 2013 Insights on Wealth and Worth report on Tuesday. The nation’s oldest trust company, under the wing of Bank of America since 2007, surveyed 711 wealthy American adults over the age of 18 with investable assets north of $3 million on a variety of wealth-related topics. The results revealed a significant amount of dissonance in this cohort, which U.S. Trust has labeled “high net worth investors.”
Their primary investing goal is the expansion of their asset base, but they maintain large cash piles. They are confident that they are prepared for retirement, but they haven’t adequately accounted for basic risks like inflation and taxes. They value their family above all else, but have not factored the long term medical care of their relatives into their financial plans.
In short, the respondents’ behavior does not reflect their goals. Of course, this suggests that America’s wealthy would be wise to consult a full service wealth management institution such as U.S. Trust, where a team of professionals could appropriately handle the complexities of their expansive financial lives. Upon reading the report’s findings, this was naturally my first thought. But try not to be too cynical; the survey was administered by an independent research firm.
The good news is that high net worth investors are psychologically prepared to put their capital back to work. Since 2009 the great frustration of investment advisers across the country has been the mountain of cash on the sidelines that isn’t earning a market return, or paying them fees. Last year’s Insights on Wealth and Worth report found that 58% of respondents prioritized asset preservation over growth, indicating that high net worth individuals were still hesitant to dive back into risk assets. But in just one year’s time sentiment has sifted measurably. Now, a majority (60%) prioritize growth over preservation.
Though they may prioritize growth, most high net worth individuals aren’t yet actively in full pursuit of it. U.S. Trust found that 56% of respondents still hold a “substantial amount” of their wealth in cash or cash equivalent accounts. As markets deteriorated at the onset of the Great Recession, many investors moved to cash and other instinctively defensive plays like gold to protect their wealth, missing a veritable clearance sale on U.S. equities in the process.
With many American stocks still quite appealing on a valuation basis, and Washington steadily expanding the monetary base in an attempt to support the labor market, high net worth individuals might be well served in the long run to carefully adjust their portfolios sooner rather than later. Interestingly, they overwhelmingly seem to share that mindset, with 86% of respondents believing that “long term buy and hold investing” is the best way to make money over time. All that’s left for them now is to actually do it.
But comprehensive wealth management has never been as simple as successfully managing investments, which itself is no easy task. A myriad of political and personal factors can affect returns and wealth significantly, while costs that are not taken into account for can easily render the best strategies irrelevant.
Despite the fact that 52% of high net worth individuals who have yet to retire are “very confident” that they will have the income they need in retirement, two-thirds are admittedly not well-informed about the impact of recent tax changes on their plans, while 52% have not considered the impact of taxes on their investment gains at all. Nearly half haven’t even considered cost of living increases and inflation. A shocking 82% of respondents have not accounted for the long term financial needs of their parents and in-laws. In the words of Keith Banks, President of U.S. Trust, “These risks, that are potholes today, could be sinkholes tomorrow if not addressed.”
Clearly, many high net worth individuals are not fully aware of just how complex their financial lives are, and the many risks that threaten their wealth. Perhaps this is because a majority aren’t even aware that they are rich. In fact, only 43% of participants said that they consider themselves to be wealthy. The Federal Reserve announced last summer that the median net worth of American households had fallen to just $77,300 in 2010. It would appear that many Americans worth more than $3 million need to become familiar with that fact and take greater control of their financial lives. Of course if they don’t have the time or expertise, they could always hire a professional.
Posted by Steven Maimes, The Trust Advisor
BNY Mellon Corp , the world’s largest custody bank, said it would add up to 100 positions at its wealth management unit, expanding the sales force at the unit by 50 percent in the next two years.
Banks such as Morgan Stanley and Goldman Sachs Group Inc have been expanding their less risky wealth management businesses as increased regulations hit investment banking.
BNY Mellon said on Wednesday it would add private and mortgage bankers, portfolio managers and wealth strategists at the wealth management unit.
“As part of a long-term growth strategy, we are dedicating substantial resources toward strengthening wealth management’s global distribution capabilities and team,” Curtis Arledge, Chief Executive of BNY Mellon Investment Management, said in a statement.
BNY Mellon and other custody banks have been struggling with low interest rates. The company reported a first-quarter loss due to a high-stakes tax battle with the U.S. Internal Revenue Service.
Posted by Steven Maimes, The Trust Advisor
LPL Fined $7.5 Million and Ordered to Establish $1.5 Million Fund to Compensate Affected Customers
The Financial Industry Regulatory Authority (FINRA) announced today that it fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.
As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.
Brad Bennett, Executive Vice President and Chief of Enforcement, said, “As LPL grew, it did not expand its compliance and technology infrastructure; and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails. This case sends a strong message to firms to make sure your business does not outgrow your compliance systems.”
Some examples of LPL’s 35 email failures include the following.
Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
LPL failed to archive emails sent to customers through third-party email-based advertising platforms.
In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren’t any “red flags” suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.
In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.
In concluding this settlement, LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
The investigation was conducted by FINRA’s Department of Member Regulation and Department of Enforcement.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2012, members of the public used this service to conduct 14.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.
Posted by Steven Maimes, The Trust Advisor
NYT article by Nicholas Confessore, David Kocieniewski and Michael Luo
During the summer of 2010, the dozen or so accountants and tax agents of Group 7822 of the Internal Revenue Service office in Cincinnati got a directive from their manager. A growing number of organizations identifying themselves as part of the Tea Party had begun applying for tax exemptions, the manager said, advising the workers to be on the lookout for them and other groups planning to get involved in elections.
The specialists, hunched over laptops on the office’s fourth floor, rarely discussed politics, one former supervisor said. Low-level employees in what many in the I.R.S. consider a backwater, they processed thousands of applications a year, mostly from charities like private schools or hospitals.
For months, the Tea Party cases sat on the desk of a lone specialist, who used “political sounding” criteria — words like “patriots,” “we the people” — as a way to search efficiently through the flood of applications for groups that might not quality for exemptions, according to the I.R.S. inspector general. “Triage,” the agency’s acting chief described it.
As a grim-faced President Obama denounced the “inexcusable” actions of the I.R.S. last week and lawmakers of both parties lined up in Washington on Friday to accuse it of an array of misconduct, everything seemed so clear: the nation’s tax agency had deliberately targeted conservative activists, violating the public trust — and perhaps the law.
While there are still many gaps in the story of how the I.R.S. scandal happened, interviews with current and former employees and with lawyers who dealt with them, along with a review of I.R.S. documents, paint a more muddled picture of an understaffed Cincinnati outpost that was alienated from the broader I.R.S. culture and given little direction.
Overseen by a revolving cast of midlevel managers, stalled by miscommunication with I.R.S. lawyers and executives in Washington and confused about the rules they were enforcing, the Cincinnati specialists flagged virtually every application with Tea Party in its name. But their review went beyond conservative groups: more than 400 organizations came under scrutiny, including at least two dozen liberal-leaning ones and some that were seemingly apolitical.
Over three years, as the office struggled with a growing caseload of advocacy groups seeking tax exemptions, responsibility for the cases moved from one group of specialists to another, and the Determinations Unit, which handles all nonprofit applications, was reorganized. One batch of cases sat ignored for months. Few if any of the employees were experts on tax law, contributing to waves of questionnaires about groups’ political activity and donors that top officials acknowledge were improper.
“The I.R.S. is pretty dysfunctional to begin with, and this case brought all those dysfunctions to their worst,” said Paul Streckfus, a former I.R.S. employee who runs anewsletter devoted to tax-exempt organizations. “People were coming and going, asking for advice and not getting it, and sometimes forgetting the cases existed.”
Who gets the blame and how far it goes are questions already consuming Washington. Two top I.R.S. officials have resigned, including the acting commissioner, Steven Miller. The Justice Department has begun an investigation into potential civil rights and criminal violations by the I.R.S. This week, a House committee will seek to depose five I.R.S. employees, including a midlevel executive in Washington and a Cincinnati specialist said to have handled the cases in the spring and summer of 2010.
“I think that what happened here was that foolish mistakes were made by people trying to be more efficient in their workload selection,” Mr. Miller testified before a House committee Friday. While “intolerable,” he said, it “was not an act of partisanship.”
As a storm of criticism washes over what is — even in the best of times — the federal government’s most reviled agency, some of those in Cincinnati agreed.
“I don’t believe there’s any such thing as rogue agents — there are some that aren’t as competent as others, just like in any workplace,” said Bonnie Esrig, 60, a senior manager in the I.R.S. office who retired in January, in part over disagreements with other officials there.
“I was not a happy camper leaving that organization,” she added, “and I can still say that I don’t think there was malice behind it at all.”
Administering the nearly four-million-word federal tax code involves so many arcane legalities, and is so fraught with potential to ignite Washington’s partisan skirmishes or infuriate taxpayers, that much of the I.R.S. is run by lawyers.
But the Exempt Organizations Division — concentrated in Cincinnati with fewer than 200 workers, according to I.R.S. officials — is staffed mostly with accountants, clerks and civil servants. Working for one of only three I.R.S. divisions not charged with collecting tax revenue, specialists in the Determinations Unit in Cincinnati primarily review and process roughly 70,000 applications for exemptions each year, relatively few from groups engaged in election activity.
Inside the agency, the unit was considered particularly unglamorous. “Nobody wants to be a determination agent,” said Jack Reilly, a former lawyer in the Washington office that oversaw exempt organizations. “It’s a job that just about everybody would be anxious to get out of it.”
Flood of Applications
In recent years, the office’s biggest headache was not the rising tide of political groups seeking tax exemptions or the growing calls from Washington lawmakers, chiefly Democrats, demanding closer scrutiny of big-spending political operations claiming tax-exempt status. The office was consumed with a different problem: a tweak Congress had made to the tax code that threatened more than 400,000 nonprofit groups around the country with an automatic loss of tax exemption, potentially putting some out of business, according to a report by the Taxpayer Advocate Service, which handles complaints about tax cases. Tens of thousands of such groups had reapplied for exemptions, overwhelming the office with queries and paperwork.
The rules governing those traditional charities, known as 501(c)3 groups, are relatively clear. But after the Supreme Court’s 2010 Citizens United decision on campaign financing freed corporations and unions to spend money on elections, hundreds of new applications began to arrive from Tea Party and other organizations. Most sought a different status, 501(c)4, under which “social welfare” nonprofit groups may engage in a limited amount of election activity without registering as political action committees and disclosing their donors.
Those indicating that they will intervene in elections typically receive closer scrutiny, former I.R.S. officials said, because of the potential that they may not be entitled to a tax exemption.
It is not unusual for I.R.S. specialists to search for patterns in applications, in part for clues toward fraud and scams — a single tax preparer employing the same tax gambit for multiple clients, for example — and in part to ensure that similar groups are treated in a consistent way, the former officials said.
It is not yet clear which manager in Cincinnati asked for an initial keyword search of Tea Party applications, Congressional aides said. One of the employees that the House committee is seeking to interview this week, Joseph Herr, had been a manager in charge of the group of specialists in Cincinnati from its inception through August 2010, according to the aides.
By October 2010, a batch of 40 cases were under heightened review, 18 of them with “Tea Party” in the group names. Specialists throughout the Determinations Unit had been issued a “Be on the Lookout” notice for Tea Party applications, and some were given training on how to evaluate groups planning to do election-related work, according to the I.R.S. inspector general.
In October 2010, as part of a reorganization of the unit, responsibility for the cases was shifted to a different group of specialists. Some applications that had been farmed out to Determinations Unit specialists elsewhere were moved back to the Cincinnati office.
One manager there complained that the “technical unit” — lawyers, chiefly in Washington, who advise the specialists on the tax law — had been slow in providing guidance on the applications, according to the inspector general. Over the next several months, the inspector general said, low-level specialists, managers and the lawyers appeared to struggle to come up with a consistent set of criteria and questions to ask the groups.
Philip Hackney, who was an I.R.S. lawyer in Washington, occasionally reviewed the exempt unit’s work until 2011 and was not involved in the Tea Party cases. He said that several times he and other lawyers revised the procedures the Cincinnati employees devised to scrutinize applicants because their questions might be interpreted as intrusive or politically insensitive.
“We’re talking about an office overwhelmed by 60,000 paper applications trying to find efficient means of dealing with that,” said Mr. Hackney, who is now a law professor at Louisiana State University. “There were times where they came up with shortcuts that were efficient but didn’t take into consideration the public perception.”
As the review process slowed to a crawl, groups whose applications were hung up in I.R.S. purgatory pressed for any information they could glean from the specialists handling their cases. Occasionally they got glimpses of what was unfolding behind the scenes.
The Shenandoah Valley Tea Party Patriots, a small group in Virginia, applied for 501(c)4 status in the spring of 2010. The organization’s application was assigned to Elizabeth Hofacre, who appears to have handled many of the initial applications flagged for review.
Frustrated by the slow pace, Mark Daugherty, the group’s treasurer at the time, called the Cincinnati office in February 2011. He said in an interview that he was directed not to Ms. Hofacre but to a different I.R.S. employee, who told Mr. Daugherty that he had a “stack of Tea Party applications” on his desk and that they were getting special scrutiny because they represented a “new type of animal.”
Tom Clifton, the treasurer of the Mid-South Tea Party in Memphis, said he called the I.R.S. repeatedly over the year and a half it took for his group to win approval of its tax-exempt status. Every time, he said, the agency employees he talked to alluded to how they were “overrun with applications” or told him, “You don’t have any idea how much we have to do here.”
“Most of the time, I would ask, ‘Well, if that’s the case, why do you have to have so much information that doesn’t seem pertinent?’ ” Mr. Clifton said, referring to several rounds of follow-up questions he received. “None of them could ever answer that.”
In July 2011, Lois Lerner, the director of the Exempt Organizations Division in Washington, held a briefing with employees involved with the review. She learned just how far off track the Cincinnati office had gone: specialists had been told to flag not only Tea Party groups, but applications describing particular policy views, like opposition to federal spending, that tend to be espoused by conservative groups. In all, more than 100 applications had been flagged. Almost none had been approved.
Ms. Lerner insisted that the specialists broaden their criteria to flag any group that had suggested plans for lobbying or political activity, according to the inspector general. But a few months later, in November, according to the inspector general, a midlevel official in Washington temporarily overseeing the Cincinnati office told a supervisor there that the guidance was “too lawyerly.” The guidelines were revised several times, as new specialists and lawyers joined the effort.
By January 2012, employees in Cincinnati, apparently without consulting senior officials, chose new keywords, including “educating on the Constitution” and “social economic reform/movement.” That month, the specialists in Cincinnati and elsewhere began sending out increasingly exhaustive, sometimes intrusive questionnaires.
More than 20 months after applying to the I.R.S., the Shenandoah Valley Tea Party Patriots received its first follow-up letter. Signed by Mitch Steele, another specialist in Cincinnati, it listed 38 questions, including requests for copies of all of the group’s newsletters, a résumé for each of the group’s officers and the names of any officer who had plans to run for public office.
Marcus Owens, who served as the director of the Exempt Organizations Division until 2000 and is now a private tax lawyer, said he believed that the specialists were trying to develop a single, long survey that could be sent to many kinds of groups.
“There was an effort at standardization of questions,” Mr. Owens said. “So they might have made the list longer in an effort to have a one-size-fits-all questionnaire so they could just send it out the door.”
Not all conservative groups that got special scrutiny received follow-up requests for additional information. But some liberal groups did: Progress Texas, part of a national network of liberal advocacy groups, ProgressNow, received a follow-up questionnairefrom the I.R.S. in February 2012, similar to the ones many Tea Party groups received, containing 21 questions. It took 479 days for Progress Texas to be approved, officials there said.
The inspector general would determine that I.R.S. agents asked 170 applicants for additional information, with 98 asked at least some questions that were unnecessary. Donor lists — a particularly sensitive topic because they do not have to be disclosed to the public — were requested from 27 groups, 13 of them with Tea Party names, according to the inspector general.
The intrusive questions prompted many of the Tea Party groups to complain that they had been targeted by the I.R.S. in an election year. Ms. Lerner ordered the Cincinnati unit to stop issuing new requests for more information, while other managers sought to retract some requests for donor information and grant extensions for answering questionnaires to other groups caught in the net. In Washington, word of the problems began to percolate through the upper ranks of the I.R.S., though exactly how much was known — and by whom — is not yet clear.
Headway on Approvals
By last May, the bureaucratic machinery in Cincinnati had finally begun to chug into motion: after issuing no approvals for months to any organization that had been flagged for special scrutiny because of political activity, the I.R.S. issued a handful that month and then nearly 40 in June, many of them to Tea Party groups, according to public agency records.
But by then, the controversy had spread well beyond Cincinnati. Republican lawmakers demanded answers from Douglas H. Shulman, the I.R.S. commissioner at the time, who was appointed by President George W. Bush. He said he was unaware that any conservative groups had been targeted — a statement sure to figure in questioning when he testifies on the Hill this week.
Another year would pass before the agency publicly acknowledged a systemic problem, and then only at a conference of tax lawyers at which Ms. Lerner answered a question about the reviews. On Friday, it emerged that she had planted the question with an audience member.
Some former agency officials and outside advocates said they worried about the chilling effect the controversy could have on legitimate enforcement. Even as the agency was scrutinizing small nonprofit organizations, critics say, it appears to have done little to crack down on large 501(c)4 groups that spent at least half a billion dollars on political advertising during the last four years, some in seeming defiance of the I.R.S. rules. Efforts by the agency to clarify those tax rules — a potential first step toward curbing abuses — began last summer but are still in the early stages.
Mr. Hackney, the former I.R.S. lawyer, said he was disappointed that the agency had not had better management to prevent the missteps, particularly the delays. But he said he feared that the politically charged investigation might descend into a witch hunt that leaves low-level I.R.S. employees too intimidated to enforce the tax code.
“It would be tragic to see the I.R.S. be debilitated by this,” he said. “Its work is too important.”
Outside the Cincinnati office on Thursday, employees on smoking breaks voiced many complaints. Pay freezes, mandatory furloughs and the effects of sequestration were all testing their already low morale. But the scandal, some said, had made things worse.
“There’s a buzz in the office about this Tea Party situation,” said Neal Juarez, a case advocate in the Taxpayer Advocate Service. Like several other I.R.S. workers, Mr. Juarez was skeptical that employees in Cincinnati would have acted as they had without some direction from leadership in Washington.
“You know what they say when there’s trouble,” he added. “You know what rolls downhill.”
Posted by Steven Maimes, The Trust Advisor